What’s happening to our rock star economy?

Let’s face it – the economy has been great.  The New Zealand Listed Property sector returned around 35% last year, and the New Zealand share market around 18%. So if the market comes back a bit, it’s hardly a surprise.

In lots of ways, New Zealand is a micro climate that mirrors what’s happening globally. Economically we have had a sunny financial period for over the past 10 years. This great economic period has been based on cheap money due to quantitative easing. This was part of the answer to the global financial crisis. Quantitative easing is basically central banks of Europe and the US, printing extra money. This increased money supply has seen interest rates fall globally to historical low levels.

This cheap money has also seen all capital assets (such as shares and property) strongly increase in value over the past 10 years. Employment and business confidence has been strong as we have all felt wealthier and more confident. This has lead to us all spending more and the economic treadmill has been spinning overtime.

Unfortunately though, things aren’t all rosy out there. We are seeing redundancies in the rural support industries as farmers put their cheque books away. The banking industry is starting to put the squeeze on farmers and businesses. I am getting calls weekly from individuals telling me that the bank is limiting access to funding. This isn’t entirely the banks’ fault as the New Zealand Reserve Bank is leading the charge with talk of increased capital reserves and favouritism towards residential mortgages.

In my opinion, we are also seeing extremely poor leadership from politicians, both locally and on the global stage. You only need look at the US or UK to see what I mean. Short term populist thinking isn’t helping the potential economic disaster that could be building. A great example is what is happening in the US. I think a lot of why Trump can get away with his trade war is the underlying belief that somehow China’s success is America’s loss.

We do expect the markets to become more volatile in the near future. This is going to create opportunities to make money. It’s a story I’ve been telling my clients for a couple of years now – “keep some investment money as cash!” That way, we’ll be able to take advantage of the opportunities as they appear.

An example would be Z Energy (ZEL). Two years ago ZEL was trading at $7.70 per share. Today it’s trading at $5.62 per share, with a gross cash dividend of 10.66%. At these rates, this is a great buy. Has anything changed with ZEL as a company? Well nothing apart from it becoming a political football (as the government tries to deflect criticism of their regional fuel tax they have added to our fuel costs).

ZEL is a truly integrated utility organisation, from refinery to its sale of 45% of all New Zealand fuel usage. It is profitable and well run, yet market sentiment has forced the price of this stock down around 13%. 

If you bought your ZEL two years ago and then doubled up your investment today, your average cost per share would be $6.70 per share. This would still mean you are earning a 9% gross dividend on your total investment. Not bad considering term deposits are at around 2.8% for 12 months.

Another example would be Metlifecare (MET). Today this share is trading at $4.47, down around 30% for 12 months. MET is trading at basically a 40% discount to the NTA (net tangible asset value) of the company. Think of a company’s NTA as the zombie value of the company. It is the value of the assets if the company died and went broke, and the assets got sold off. To be able to buy a company at 60% of their underlying asset value seems an amazing deal to me. The retirement sector isn’t going away. Today, people 75 years old and above make up around 7% of the population – this will grow to around 17% of the population by 2040.

I believe the next 12 to 24 months will provide an opportunity for informed investors to make a lot of money. But there are a few things I would advise:

  • Have a strategy in place for the coming volatility. This might include taking profits and moving into assets you can see and understand. I’m not a great fan for managed funds where you don’t know where your money really is invested.
  • Don’t ever delegate the decision of where you invest your money. It’s your money and you need to have control.
  • Never give your money to someone who controls the cheque book. Don’t ever give your money to anyone who can’t prove that the money can’t be misused or accessed by a third party. Keep the ability to sign off any change and never delegate this to anyone.
  • Don’t follow the crowd – what happened last year doesn’t mean it will happen again this year.
  • If you do use a managed fund, be sure you understand the structure and the assets you are investing into. You need to understand how the fund is benchmarked, how much cash the manager can hold, and how far away from an index they can be within the fund managers’ rules. Interestingly this isn’t that easy to find out from straight research. It takes a bit of digging.
  • Understand the fees you are paying. We often see people paying up to 2.75% of the total portfolio value in fees.

If you want to talk to me about investing or you would like me to review an existing investment portfolio, give me a call. I will happily meet for a free initial investment chat.

 

John Barber
WealthDesign – a life well planned